Forex Market Outlook 11/15/11

Well it looks like its bond yields in Europe that have the markets in a tizzy yet again this morning, with the Italian 10-year note back up above 7%, and a short-term note auction in Spain did not go off as planned as they sold less than the 3.5 billion euros they had hoped, at an interest rate of over 5% vs. 3.6% just last month.

This is troubling indeed as the cost to borrow in Europe is starting to rise again and this comes AFTER the supposed rescue package that was put in place begrudgingly last month. Part of the problem is that the plan appears to be woefully insufficient and it looks like the market wants to test European resolve. The only way that this is going to come to a close is if the ECB agrees to be the “buyer of last resort” for these bonds and that appears highly unlikely.

With new governments transitioning in Greece in Italy, it was a advantageous time for bond vigilantes to flex their muscles.

However, the actually data coming out of Europe is not horrible, with German GDP figures coming in slightly higher than expected and French GDP as expected. However, the German ZEW economic surveys came in a 3-year lows showing investor and business angst in the wake of current conditions.

In the UK, CPI data came in lower than expected but still at elevated levels of 5% vs. an expected 5.1%. Tomorrow’s inflation report from the BOE will show the mindset of the Central bank who appears to be fine with short-term inflation in attempts to grow the economy. The retail price index also came in slightly lower than expected.

In Australia, the release of the RBA rate policy meeting minutes showed that global risk emanating from the Euro debt crisis was the primary driver of the last interest rate cut, and that they are maintaining a mild dovish bias going forward. The “mild easing” was justified in order to keep the Australian economy fluid.

Later this morning here in the US we will get the Advance Retail Sales figures which are expected to show a gain of .3%, which is lower than last months 1.1% but already “baked into the cake”. This is an awfully low bar considering the “recovery” we have been hearing about so I would like to see this number exceed by a decent margin. To truly have economic recovery here in the US, the consumer has to return as they represent some 70% of the economy so it starts with Advance Retail Sales figures.

Also out this morning is PPI data which will likely be ignored by Bernanke and the Fed as they are hell-bent on keeping an easy money policy to help support the floundering economy. Empire manufacturing figures round out the morning but likely will have little impact.

So this morning’s risk aversion and sell-off could be countered by a better-than-expected Advance Retail Sales figure that could reverse market sentiment. However, should the number come in worse than expected, look out below!

Markets are still very jittery and the Euro debt crisis could continue to worsen if there is no credible belief that the individual countries can get their act together with austerity with help from the ECB to keep borrowing costs low.

Until both of these things happen, the Euro zone is still at risk of imploding as the market demands more and more from the beleaguered region. It would help if the US could also get its house in order, though this unfortunately seems like a pipe-dream as well.

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